Company Notes Digest 05.06.18

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

Companies express optimism and project a multi year, multi industry upturn. Further, the global outlook remains positive. Still, most companies are feeling the heat of increasing costs especially on freight which they re seeking to pass on to consumers.

The Macro Outlook:

CEOs expect this cycle to continue for another several years

“2019 is going to be another great year. And it’s on the back of refining, petrochemicals, gas, LNG. It’s on copper. There’s lot of work that’s coming this year in the mining sector…we’re in a multi-industry multiyear upturn”- Fluor (FLR) CEO David Seaton

“The cycle has not peaked…we’re seeing positive orders on a global basis. I’ve been around a while and I’ve been through three cycles. This cycle has not ended…my visibility in the cycle is solid at least three to four years” – Emerson Electric (EMR) CEO David Farr

“the U.S. economy is still on a good growth trajectory” – San Francisco Fed Chair President John Williams

The labor market is also solid

“If you look at the job growth, it’s been very solid over the last three or four months. Unemployment did come down…Wage growth is still I think on an upward trend, but it’s not picking up fast…Labor market is still very strong and getting stronger” – San Francisco Fed Chair President John Williams

“The labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low” – FOMC

Commercial real estate demand is robust

“We are experiencing robust demand from all matter of industries in all of our submarkets. Our tenants are optimistic, aggressive, growing and up keyed about New York” – Vornado Realty Trust (VNO) CEO David Roth

On the other hand, companies are experiencing some cost pressures especially on freight

“On the cost pressures, where we’re seeing it most acutely is on freight, like many other companies” – Kellogg (K) CFO Fareed A. Khan

“Our inflationary pressures are really coming from freight and sort of the wage and benefits…freight costs have increased for every company that puts anything on a truck and we are expecting these costs to remain elevated throughout the year…freight costs are up industry-wide” – B&G Foods (BGS) CEO Robert C. Cantwell

“This year we are seeing a more difficult cost environment, particularly we’re still dealing with about 70 basis points of impact from the memory pricing environment that we’re working through.” – Apple (AAPL) CFO Luca Maestri

Which are being passed on to consumers

“We have communicated price increases across the majority of our portfolio to all of our customers….our strategy does not appear to be different than the majority of our competitors who are also wrestling with costs.” – B&G Foods (BGS) CEO Robert C. Cantwell

“Pricing will continue to accelerate as we go through this. But at the end of the day, pricing is going to rise we think throughout the balance of the year” – Ecolab (ECL) CEO Doug Baker

Interest rates should keep rising

“While geopolitical uncertainty and the prospect of a trade war could drive down interest rates, we believe the economic fundamentals point toward rising rates, although not to pre financial crisis levels.” – MetLife (MET) CEO Steven Kandarian

International:

Trade wars aren’t good for anybody

“I think my own view is that China and the U.S. have this unavoidable mutuality where China only wins if the U.S. wins and the U.S. only wins if China wins and the world only wins if China and the U.S. win. And so I think there’s lots of things that bind the countries together and I’m actually very optimistic.” – Apple (AAPL) CEO Tim Cook

“a trade war is not good for anybody…the trade war actually will hurt small businesses in the United States.” – Alibaba Group Holding (BABA) Executive VC Joseph C. Tsai

Emerging market growth should pick up in ‘19, ‘20

“We’re going to see the emerging markets come in and drive faster growth versus the mature markets as we get into 2019 and 2020.” Emerson Electric (EMR) CEO David N. Farr

Brexit has been less disruptive than expected

“There seems to be a little bit of calm has entered the markets after the kind of shock from the Brexit decision maybe a couple of years back. But it doesn’t appear to be quite as disruptive as perhaps people feared”- McDonald (MCD) CEO Steve Easterbrook

Financials:

Volatility has normalized

“Volatility is alive and well…that scenario of flat volatility doesn’t last long historically. It’s unusual in this instance, but we believe history is what we look back to and we’ll go to a normal upward sloping curve in vol…the market is still in adjustment mode or flat” – CBOE Global Markets (CBOE) CEO Ed Tilly

“we’ve dipped a toe in, but it’s a very, very small toe… It’s a new asset class we’re excited about it if and when it becomes more regular, regulate and essentially cleared, certainly we will put a big toe and all the little toes will follow and we’ll be a big market maker there.” –Virtu Financial (VIRT) CEO Douglas Cifu

But there’s less interest than there was

“there’s a little less interest than there was in the latter part of the fourth quarter and the first quarter.” – Mastercard (MA) CEO Ajay Banga

Office Reits are selling at substantial discounts to NAV

“The office companies and all of our brethren are selling at a very substantial discount NAV. Everybody is complaining about it.” – Vornado Realty Trust (VNO) CEO Steven Roth

Consumer:

Millennials are beginning to dominate the economy

“Millennials are expected to become a huge economic force in the coming years that already dominating lot of buying decisions.” – Snap (SNAP) CEO Evan Spiegel

“We keep rolling out the omnichannel capabilities…it’s a new business model, not just for us but also for our partners and that needs to be optimize, that needs to be nurtured as well” – Adidas (ADDYY) CEO Kasper Rorsted

“We are in course of the rollout of our omnichannel services, this means click and collect and order from store.” – Hugo Boss’ (BOSSY) CFO Yves Müller

Restaurants are investing in delivery

“Restaurants are still testing the waters and trying to understand how online ordering and online delivery support their overall growth…every boardroom is asking the management team, what are we doing about online ordering” – GrubHub (GRUB) Matthew M. Maloney

Technology:

Cloud computing has significantly decreased the cost of starting a tech company

“What also happened in cloud computing is, after this was all said and done, a lot of tiny startups said, hey, like suddenly, I don’t actually need to spend a godly amount of money for service and I can get my product to market at the end of – just using my laptop in a coffee shop. And so the creation of startups became cheaper and therefore, there were more startups.” – Shopify (SHOP) CEO Tobi Lütke

But can tech decrease the cost of creating good content?

“Netflix has demonstrated an ability to turn cash into subscribers but not the ability to turn subscribers into cash” – Greenlight Capital Re (GLRE) Chairman David Einhorn

Humans are better than machines at some things

“So, we had fluffer bot, which was really an incredibly difficult machine to make work. Machines are not good at picking up pieces of fluff. Human hands are way better at doing that” – Tesla (TSLA) CEO

Industrials:

The market for business jets is strong

“I would say we’re seeing this pretty much across all segment of the business as small medium and large, very strong in medium and large. And from a region standpoint, U.S. is good. It’s solid, but we’re seeing also order picking up and increasing steadily…our used inventory level is at the lowest point in over about 10 years. So it gives us confidence now that we are really trending in the right way” – Bombardier (BDRBF) CEO Alain Bellemare

The price of oil is being supported by balanced supply and demand and geopolitical risk

“What we’re seeing in oil is balance in terms of supply and demand and a lot of political risk most of which everybody suspects is baked into the price” – Ecolab (ECL) CEO Doug Baker

LNG Supplies are down

“supplies around the world are down. There’s a lot of maintenance activity up in Europe and in other places” – Cheniere Energy (LNG) CEO Jack A. Fusco

Expect some modest price increases on shallow rigs

“we believe rates for shallow rigs need to increase further and by several thousand dollars per day. If our customers expect industry segments to deliver on the safety and performance they need, rates must increase…The industry is suffering right now.” – Precision Drilling (PDS) CEO Kevin Neveu

Miscellaneous Nuggets of Wisdom:

Two views on moats:

Moats are lame, what matters is the pace of innovation

“I think moats are lame. It’s nice sort of quaint in a vestigial way. If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness…Whichever company has the highest rate of innovation, unless that company is actively killed by its competitors in some way that’s nefarious, or shoots itself in the foot, it will at some point exceed those competitors” – Tesla (TSLA) CEO Elon Musk

No one ever said you shouldn’t improve your moat

“Certainly you should be working on improving your own moat and defending your own moat all the time. And Elon may turn things upside down in some areas…There are some pretty good moats around…I don’t think he’d want to take us on in candy.” – Berkshire Hathaway CEO Warren Buffett